ITAD BIR Ruling No. 094-12

February 16, 2012 ITAD BIR RULING NO. 094-12 Article 12, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 011-10; BIR Ruling No. ITAD 051-09 Tsuchiya Kogyo Phils., Inc. Zone 2 Bldg., 15 DBP cor. Malunggay St. Food Terminal Complex, FTI, Taguig City Attention: Atty. Rizalino C. Vieza President Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on April 23, 2010, on behalf of TSUCHIYA KOGYO CO., LTD. ("TKJ") , requesting confirmation that the royalty payments made by TSUCHIYA KOGYO PHILS., INC. ("TKPI") to TKJ under the Technical Assistance Agreement are subject to the preferential tax rate of 10 percent pursuant to Article 12 (2) (b) of the amended Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Japan tax treaty, as amended"). It is represented that TKJ is a nonresident foreign corporation, organized and existing under the laws of Japan, with business address at 2-4 Kojimachi Chiyoda-Ku, Tokyo, Japan based on the Certificate of All Historical Matters Recorded About the Company issued by the Tokyo Legal Affairs Bureau dated March 8, 2010; that TKJ is in the business of printing, processing and trading of synthetic resins and paper products; that TKJ is not registered as a corporation or as a partnership in the Philippines as evidenced by the Certificate of Non-Registration of Company issued by the Securities and Exchange Commission ("SEC") dated April 23, 2010; that on the other hand, TKPI is a domestic corporation, registered with the Board of Investments ("BOI") as a new export producer of graphic and mark logo under Certificate of Registration No. 2007-071 dated April 16, 2007; and that, TKPI's office address is at Zone 2 Bldg., 15 DBP cor Malunggay St., Food Terminal Complex, FTI, Taguig City. It is also represented that on January 1, 2007, TKJ and TKPI entered into a Technical Assistance Agreement ("Agreement") with the following terms: DHIaTS a. TKJ shall furnish TKPI with the non-exclusive right to employ and practice the Know-How 1 necessary for the production and sale of Graphic and Mark Logo ("Product"), as well as the right to use the trademark right pertaining to the Product; b. TKJ shall, from time to time during the duration of the Agreement, furnish TKPI with technical assistance necessary for the engineering and operation of TKPI's plant for the production of the Products by providing, at the request of TKPI, qualified engineers; c. In consideration of the right granted, TKPI shall pay royalties in the fixed sum of Ninety-Six Thousand US Dollars ($96,000.00) per annum; and, d. The Agreement is effective for ten (10) years from January 1, 2007. that based on Certificate of Compliance No. 5-2007-00115 issued by the Intellectual Property Office of the Philippines dated November 23, 2007, which is valid for ten years from January 1, 2007 to December 31, 2016, the Agreement complies with the provisions of Sections 87 and 88 of Chapter IX, Part II of the Intellectual Property Code (Republic Act No. 8293) on Voluntary Licensing. It is further represented in the Affidavit of TKPI dated September 15, 2010, that pursuant to the Agreement, TKJ dispatched the following technical staff on the dates indicated herein: a. Hitoshi Kondo September 12, 2007-October 13, 2007 October 27, 2007-November 7, 2007 December 16, 2007-December 20, 2007 January 20, 2008-January 29, 2008 December 11, 2008-December 14, 2008 January 5, 2009-April 22, 2009 April 25, 2009-May 24, 2009 May 4, 2010-May 9, 2010 June 11, 2010-June 17, 2010 July 9, 2010-August 1, 2010 b. Matsumoto Gaku March 9, 2008-March 14, 2008 July 6, 2009-July 9, 2009 c. Masaaki Sano March 26, 2010-March 29, 2010 March 30, 2010-March 31, 2010 May 4, 2010-May 9, 2010 August 19, 2010-August 23, 2010 d. Munetaka Nakaima March 26, 2010-March 31, 2010 July 9, 2010-August 1, 2010 e. Toshiro Setoguchi March 9, 2008-March 14, 2008 December 11, 2008-December 14, 2008 July 16, 2009-July 20, 2009 February 21, 2010-February 24, 2010 It is finally represented that the issue/s or transaction subject of the above request for ruling is not under investigation neither is it subject of an on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings nor a judicial appeal based on the Certification of TKPI dated June 28, 2010. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to royalties derived in the Philippines by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as . . ., profits and income, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "Section 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. xxx xxx xxx" In this particular case, the treaty involved is the Philippines-Japan tax treaty which, in its Article 12, provides: SDAcaT "Article 12 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: a) 15 per cent of the gross amount of the royalties if the royalties are paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting; b) 25 per cent of the gross amount of the royalties in all other cases. 3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the royalties paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the royalties, shall not exceed 10 per cent of the gross amount of the royalties. 4. The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience." With respect to the Philippines-Japan tax treaty, this is amended by the Protocol Amending the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Amending Protocol) , signed on December 9, 2006, and effective January 1, 2009. Pursuant to Article V of the Amending Protocol, the aforecited Article 12 of the Philippines-Japan tax treaty is amended as follows: "Article V Paragraph (2) of Article 12 of the Convention shall be deleted and replaced by the following: aSTHDc (2) However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: (a) 15 per cent of the gross amount of the royalties if the royalties are paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting; (b) 10 per cent of the gross amount of the royalties in all other cases. xxx xxx xxx" Prior to the amendment of the Philippines-Japan tax treaty, royalty payments are taxed at a preferential rate of 10 percent if the payor is a BOI-registered enterprise and engaged in preferred areas of investment under the investment incentives laws of the Philippines; 15 percent if the royalty payments are in respect of the use of or right to use cinematograph films and films or tapes for radio or television broadcasting; and in all other cases, 25 percent of the gross amount of the royalties. Under the Amending Protocol, beginning January 1, 2009, royalties paid to a resident of Japan will be taxed at a preferential rate of 15 percent if the royalties are paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting and 10 percent in all other cases. The aforementioned preferential tax rates shall not apply in case the Japanese resident carries on business in the Philippines through a permanent establishment situated therein. In relation thereto, Article 5 of the Philippines-Japan tax treaty, provides: "Article 5 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes especially: a) a store or other sales outlet; b) a branch; c) an office; d) a factory; e) a workshop; f) a warehouse; g) a mine, an oil or gas well, a quarry or other place of extraction of natural resources. cDCHaS xxx xxx xxx 6. An enterprise of a Contracting State shall be deemed to have a permanent establishment in the other Contracting State if it furnishes in that other Contracting State consultancy services, or supervisory services in connection with a contract for a building, construction or installation project through employees or other personnel other than an agent of an independent status to whom paragraph 7 applies provided that such activities continue (for the same project or two or more connected projects) for a period or periods aggregating more than six months within any taxable year. However, if the furnishing of such services is effected under an agreement between the Governments of the two Contracting States regarding economic or technical cooperation, that enterprise shall, notwithstanding any provisions of this Article, not be deemed to have a permanent establishment in that other Contracting State." Article I of the Amending Protocol amends the aforecited Article 5 of the Philippines-Japan tax treaty and provides: "Article I Paragraph (6) of Article 5 of the Convention shall be deleted and replaced by the following: (6) An enterprise of a Contracting State shall be deemed to have a permanent establishment in the other Contracting State if it furnishes in that other Contracting State consultancy services, or supervisory services in connection with a contract for a building, construction or installation project through employees or other personnel other than an agent of an independent status to whom paragraph (7) applies , provided that such activities continue (for the same project or two or more connected projects) for a period or periods aggregating more than six months within any twelve-month period. However, if the furnishing of such services is effected under an agreement between the Governments of the two Contracting States regarding economic or technical cooperation, that enterprise shall, notwithstanding any provisions of this Article, not be deemed to have a permanent establishment in that other Contracting State." Based on the foregoing, prior to the Amending Protocol, a permanent establishment is deemed to arise if an enterprise furnishes consultancy services, or supervisory services in connection with a contract for a building, construction or installation project, through employees or other personnel, where such activities continue (for the same project or two or more connected projects) for a period or periods aggregating more than six months within any taxable period. After the amendment, the counting of the period was changed from "six months within any taxable year" to "six months within any twelve-month period." ACcaET Accordingly, since the services extended by TKJ to TKPI pursuant to the Agreement are not consultancy services or supervisory services in connection with a contract for a building, construction or installation project, TKPI is deemed not to have a permanent establishment in the Philippines and thus, entitled to the preferential tax rates set forth in Article 12 of the Philippines-Japan tax treaty and its Amending Protocol. (BIR Ruling No. ITAD 15-09 dated May 18, 2009.) Relative thereto, please be informed that under Section III (2) of Revenue Memorandum Order No. 1-00 (Procedures for Processing Tax Treaty Relief Application) ("RMO 1-2000") , any availment of tax treaty relief (exemption from income tax or reduction of tax) shall be preceded by an application filed at the International Tax Affairs Division ("ITAD") of this Bureau at least 15 days before the intended transaction or payment of income, thus: "III. Policies: In order to achieve the above-mentioned objectives, the following policies shall be observed: xxx xxx xxx 2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form No. 0901 (Application for Relief from Double Taxation) with ITAD at least 15 days before the transaction i.e. , payment of dividends, royalties, etc., accompanied by supporting documents justifying the relief. . ." (Emphasis ours) This condition was emphasized by the Court of Tax Appeals in Mirant (Philippines) Operations Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 6382 dated June 7, 2005) where it ruled: "However, it must be remembered that a foreign corporation wishing to avail of the benefits of the tax treaty should invoke the provisions of the tax treaty and prove that indeed the provisions of the tax treaty applies to it, before the benefits may be extended to such corporation. In other words, a resident or non-resident foreign corporation shall be taxed according to the provisions of the National Internal Revenue Code, unless it is shown that the treaty provisions apply to the said corporation, and that, in cases the same are applicable, the option to avail of the tax benefits under the tax treaty has been successfully invoked. HcACTE Under Revenue Memorandum Order 01-2000 of the Bureau of Internal Revenue, it is provided that the availment of a tax treaty provision must be preceded by an application for a tax treaty relief with its International Tax Affairs Division (ITAD). This is to prevent any erroneous interpretation and/or application of the treaty provisions with which the Philippines is a signatory to. The implementation of the said Revenue Memorandum Order is in harmony with the objectives of the contracting state to ensure that the granting of the benefits under the tax treaties are enjoyed by the persons or corporations duly entitled to the same. The Court notes that nowhere in the records of the case was it shown that petitioner indeed took the liberty of properly observing the provisions of the said order. Petitioner quotes various BIR, as well as ITAD, Rulings issued to several foreign corporations seeking for a tax relief from the office of the respondent. However, not any one of these rulings pertains to the petitioner. It must be stressed that BIR rulings are issued based on the facts and circumstances surrounding particular issue/issues in question and are resolved on a case-to-case basis. It would be thus erroneous to invoke the ruling of the respondent in specific cases, which have no bearing to the case of petitioner." (Emphasis ours) This decision was also upheld by the Supreme Court in a Resolution (G.R. No. 168531) dated February 18, 2008. Furthermore, the necessary requirement laid down in RMO 1-2000 is reiterated in subsequent rulings of the Court of Tax Appeals: Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue (C.T.A. Case No. EB 456 dated May 29, 2009), CBK Power Company Ltd. vs. Commissioner of Internal Revenue (C.T.A. Case Nos. 6699, 6844 and 7166 dated March 29, 2010) and Manila North Tollways Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 7864 dated April 12, 2011). In view of the foregoing, this Office hereby DENIES relief on the royalties paid by TKPI to TKJ before the subject TTRA was filed on April 23, 2010 since the TTRA was filed beyond the 15-day period prescribed by the RMO. Accordingly, said royalties shall be subject to income tax at the rate provided under Section 28 (B) (1) of the Tax Code of 1997 cited above. However, all royalties accruing from January 1, 2009 and payable by TKPI to TKJ after 15 days from the date of filing of the TTRA on April 23, 2010 , are hereby GRANTED relief and the same shall be subject to income tax at a reduced rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (b), Article 12 of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD 11-10 dated June 16, 2010; BIR Ruling No. DA-ITAD 074-10 dated July 9, 2010) AHSaTI This ruling is issued on the basis of the facts as represented. However, if upon investigation, it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. "Know-How" refers to all technical and operational knowledge including quality control and skill now possessed by TKJ relating to the engineering and operation of a plant for the production of the Products, and more specifically includes: a. Specifications applied to the design, production and manufacture engineering; b. Technical information and other specifications relating to the Products; and, c. Technical information in connection with the operation of the plant. The foregoing shall however be limited to all drawings, specifications and other design data falling within the description set forth.